Make A Killing When Natural Gas Prices Rebound

| September 15, 2010 | 0 Comments

There’s a big question weighing on the minds of energy investors these days…

When are Natural Gas prices going to rebound?

Well, Nat. gas has been in the dumpster for a while now.  A fact most energy investors are very aware of.  Activity in this commodity has been a little dull for most of 2010.

But it hasn’t always been this way…

It wasn’t long ago that Nat. gas was in a raging bull market.  In 2005, prices exploded to over $15 per MMBtu.  Supply worries at the time sent prices on a tear.

Nat. gas surged again in early 2008 as energy prices across the board skyrocketed.

But of course, the near unraveling of the financial system in late 2008 was enough to crater Nat. gas (along with most everything else).  At one point in mid 2009, it was trading just under $3.00… a 7-year low.

And this brings us to today, as prices are hovering around $4.00.

Yes, we’ve seen a few nice rallies in the past year.  But for the most part, Nat. gas is hanging around those 2009 lows.

This commodity can’t seem to get going… and for good reason.

The current fundamentals aren’t supporting a big move higher.  New drilling techniques are bringing large amounts of Nat. gas to market.  In fact, recent working gas in storage is 3,164 billion cubic feet (Bcf).  This is 166 Bcf above the 5-year average for this time of year.

Nat. gas inventories are expected to be within 3% of the record highs of 2009 at the end of this injection season.  Abundant gas supplies are keeping a firm cap on prices.

But you have to keep a close eye on Nat. gas, and here’s why…

There are a handful of catalysts with the potential to turn the market higher.

The first is a change in U.S energy policy.  The “NAT GAS Act” (H.R. 1835) would open up a whole new world for natural gas demand.  If it passes, you can expect natural gas stocks (along with gas prices) to do a 180-degree turn and rocket higher.

But if for some moronic reason the NAT GAS Act doesn’t pass…

Low Nat. gas prices will eventually take care of itself.  Extended periods of low prices will eventually strain producers.  Lower rig counts lead to lower production.  And lower production leads to lower supplies, lower supplies lead to… you get the picture.

Eventually gas prices are going to rise.  After all, “the best cure for low prices is low prices.”

How can you take advantage of this eventual (but certain) rally?

Look for the lowest cost producers of Nat. gas.  The average production cost in the industry was $5.74 per Mcfe in the first quarter of 2010.  Find a Nat. gas producer with substantially lower costs and you’re on the right track.

These companies will get the best results when Nat. gas finally rallies. They’re also the ones who will survive the longest if prices stay low.

One such company is Southwestern Energy (SWN).  They have a production cost of around $2.76 per Mcfe.  And it just so happens, SWN is showing an attractive entry point right now.

Here’s a weekly chart of Southwestern Energy.  Notice how SWN is trading at the 200-week moving average (the green circle).  This moving average may provide some price support in the short term.

In the long term, SWN has great upside potential when the Nat. gas market rebounds.

The bottom line is this…

Natural gas prices are low right now.  But they aren’t going to stay this way forever.  It’s a good idea to be looking for good Nat. gas investments right now.  When gas prices rise due to fundamental shifts in the market, you’ll be glad you invested at lower prices.

Will it require a bit of patience?  You bet.

But with the huge potential for Nat. gas, your patience may be rewarded in spades!

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Category: Commodities

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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